ContractsProf Blog

Sid DeLong on Restitution and the Case of Andrew Cuomo

More Restitutionary Pitfalls for Aspiring Authors (Who Serve in Government)

Sidney W. DeLong

A recent dispute involving the former Governor of New York raises interesting questions about disgorgement as a remedy for breach of fiduciary duty by government officials. It also dramatically illustrates the financial risks that liability for disgorgement poses to defendants who may not have realized that they were acting wrongfully and who have received and disposed of funds before learning that they must turn them over to the plaintiff.

Disgorgement is often the only effective remedy in cases in which a breach of fiduciary duty causes harm to the plaintiff that is difficult to prove or impossible to calculate, making an award of compensatory damages measured by the plaintiff’s loss unfeasible. If plaintiff can prove that defendant was enriched by the breach, the defendant must disgorge to the plaintiff any net gains it obtained as a result of the breach, regardless of their source. Such a claim for disgorgement is entirely unrelated to any harm the plaintiff may have suffered from the wrongdoing and may give plaintiff a windfall. But disgorgement of the wrongdoer’s entire gain from the breach is thought to be necessary to prevent defendant’s unjust enrichment from the wrong and has the virtue of completely removing the incentive for wrongdoing. The same rule applies to breaches of statutory duties and other tortious wrongs.

An earlier post suggested the potential liability of John Bolton for disgorgement of the proceeds of his book, In the Room Where it Happened, on the theory that his publication of the book violated federal law and his employment contract with the government. 

Perhaps inspired by Bolton’s dispute, as reported in The New York Times, the State of New York has recently announced that it will seek disgorgement of the proceeds of former Governor Andrew Cuomo’s book American Crisis: Leadership Lessons from the Covid-19 Pandemic on the grounds that, in obtaining legally-necessary permission from the Joint Commission of Public Ethics (JCOPE) to publish the book, Cuomo wrongfully failed to disclose that he had illegally used government resources, including employee time, to produce the book.  Cuomo denies wrongdoing and says that publication was not wrongful because he received permission from the Commission for the publication. The State seeks recovery (disgorgement) of all amounts paid or to be paid to Cuomo by his publisher.

According to news reports, Cuomo received an advance of over $3 million with $2 million more to be paid over the next two years. The latter payment is unlikely to come due because of poor sales of the book. Cuomo’s attorneys have stated that after payment of expenses and taxes, he donated $500,000 of the proceeds to charity and placed the $1.5 million remainder in a trust for his children.

As an accounting detail, disgorgement usually reaches only the net amount of unjust enrichment after deducting the wrongdoer’s out of pocket costs of obtaining it. But the amounts that Cuomo claims to have spent on income taxes should not reduce his duty to disgorge the entire sum. If he is forced to disgorge the publisher’s pre-tax payment his only remedy is to file an amended tax return and seek recovery of the tax overpayment from the U.S. Government. Of course, he would be required to disgorge the amounts of his gifts to charity and to his children’s trust.

In cases such as Cuomo’s in which the defendant’s violation of law is unclear or unintentional, disgorgement may seem draconian, conferring a windfall on the plaintiff out of proportion to any harm it may have suffered and sandbagging defendant with unexpected liabilities that it may be in no position to pay. This is a stiff price to pay for the deterrent

Restitutionary claims over identifiable proceeds of wrongdoing may sometimes even reach beyond the wrongdoer to innocent transferees of the proceeds. If Cuomo is unable to pay back the full $3 million, the State may seek to claw back the money from the charity or the children’s trust, using the legal theory of fraudulent conveyance. These claims seem unlikely to succeed, however, because there is no indication that the transfers were made to hinder, delay, or defraud Cuomo’s creditors. But if Cuomo becomes insolvent, his bankruptcy trustee might be able to recover the payments as fraudulent transfers without having to prove that they were made with such intent.

As cautionary tales for government-employed authors, the Bolton and Cuomo cases can be distinguished. Assuming in each case that the government’s allegations are correct, Bolton’s wrong was in breaching his statutory and contractual duties of pre-clearance and non-disclosure, security breaches that could potentially harm the government in ways that were incalculable. As in Snepp, disgorgement of all the author’s gains from such breaches was the only feasible remedy.

By contrast, Cuomo’s initial wrong seemingly consisted only in misappropriating or misusing government resources for his private benefit, trivial misbehavior that  harmed the government in ways that are easily calculable by reference to the wages of governmental employees and the costs of office supplies.

However, JCOPE’s main complaint is that his concealment of this misuse might also have constituted an ethical breach or even a breach of fiduciary duty. This would have breached his legal duties as governor as well, in which case, perhaps New York did not ask for enough. It is, after all, it is hornbook law that a faithless fiduciary forfeits his fee in addition to any profits he may have made by breaching his trust. See Restatement (Third) Restitution § 43. The theory is that the fiduciary did not earn the compensation because he did not fulfill his duties. On this theory, attorneys have forfeited their legal fees when they breached duties to their clients. One can see great revenue-raising potential in an aggressive use of this theory. Perhaps the State of New York should seek restitution of the salary and benefits of every state official who has been shown to breach his or her fiduciary duty to the State.  It’s not likely to happen, but if it does, remember you read it here first!

Trump Organization Sues New York City for Breach of Bronx Golf Course Contract

Soon after the January 6th assault on the Capitol Building in Washington, DC,  New York City attempted to terminate contracts with the Trump Organization to operate two ice skating rinks and a carousel in Central Park (left).  It seemed like that would result in an early end to the ice skating season during a pandemic.  New York parents were desperate for ways to divert their children and fend off boredom.  They delighted in an opportunity to ponder whom they found more despicable: their former President or their current mayor. The City blinked on that one.  Those contracts with the Trump Organization were due to lapse in April in any case, so the City chose to let them run their course and not renew them.

Now, according to the New York Times, the Trump Organization is suing New York City for allegedly wrongfully terminating a 20-year contract the organization had with the city. The lawsuit centers around the city-owned course in the Ferry Point section of the Bronx, called Trump Golf Links at Ferry Point. The Trump Organization was in the sixth year of operating the course since its opening in 2015.  

The Trump Organization alleges  that “Mayor de Blasio had a pre-existing, politically-based predisposition to terminate Trump-related contracts, and the city used the events of January 6, 2021 as a pretext to do so.” A spokesman for the mayor, Bill Neidhardt, responded, saying: “Donald Trump directly incited a deadly insurrection at the U.S. Capitol. You do that, and you lose the privilege of doing business with the City of New York.”  Oooh.  That's a new wrinkle on a morals clause!

Actually, the mayor's spokesman should leave the lawyering to the lawyers.  They claim that the Trump Organization defaulted on its contracts when it failed to attract a major tournament to the course.  It is unlikely to do so in the future. The woke PGA has recently announced it would no longer be allowing a Trump-owned course in New Jersey host one of its major Tournaments.

The Trump organization claims it had no obligation to attract a major tournament. Rather, its only obligations was to maintain “a first class tournament quality daily fee golf course.”  It's legal papers include statements from professional golfers, including Dustin Johnson and Bryson DeChambeau, describing the course as “tournament quality” and  “first class.”  Not bad, but if they really wanted to impress, they should have characterized the course as "astonishingly excellent".

Thanks to ContractsProf Blog Intern, Sydney Scott, for her research assistance!

Guest Blogger Marissa Jackson Sow on Whiteness as Contract and the Police, Part II

Whiteness as Contract as a Framework for Understanding America’s Police Problem

Marissa Jackson Sow 

Part Two: Using Contract Theory to Analyze the Gap Between Expectations of Police and Police Performance        

Breaches of America’s racial contract do not go unpunished: in early June 2020, the entire world got multiple glimpses of the New York City Police Department’s violent backlash against racial justice protests. As guardians of that contract, the police used Mayor Bill de Blasio’s 8pm curfew as a means to harass, provoke, brutalize, and ultimately terrorize New Yorkers—including those, who, like my husband, had to report to work in the City after 8pm. One particularly brutal attack on peaceful protesters in the South Bronx, where we lived, on June 4 was the subject of a damning Human Rights Watch report, which concluded that the police department had planned the attack on the protesters, who were primarily Black and Latinx. My family and I left New York City, thoroughly traumatized, a few days thereafter. 

On the third night of the curfew, officers in riot gear descended upon peaceful protesters in Crown Heights, Brooklyn at approximately 11pm, tackling and detaining them. After most of their vehicles departed, one remained behind, unable to start, as the crowd began to jeer them. Once the vehicle started, the police gave the crowd the middle fingers and drove off, playing the ice cream truck song, which is titled “N****r Love a Watermelon. Ha! Ha! Ha!” The incident was captured on video and posted to social media. Police allegedly played the song out of their cruisers unprovoked in historically Black neighborhoods for weeks thereafter.

Months later, more bizarre activity from the NYPD was captured on a recording device and, again, posted to a social media platform. In advance of the 2020 general elections, officers were recorded playing pro-Trump propaganda out of a police cruiser in predominantly Black Flatbush, Brooklyn. Such activity is a flagrant violation of the official NYPD code of conduct. The theory of whiteness as contract provides guidance, pointing to the invisible common law that governs police interests and behavior—anti-discrimination laws, police department codes of conduct, and the formal terms of police officers’ employment contracts notwithstanding.

Contracts are, of course, about expectation, agreement, and performance, and such is the case whether discussing commercial contracts or social contract theory. People do not call upon the police in the hopes that the police will shoot them to death. Underlying any request for police assistance is the understanding of a contractual agreement between citizen and police that because of the taxes one pays into local government: the agreement is that citizens fund the police, and that in exchange, the police will protect and serve them. A contracts-based analysis reveals why and how this reasoning fails to translate into reality in American society vis-à-vis Black (defined here as all people of African descent, including Latinx peoples) and Indigenous (defined here as American Indian and Latinx) communities. Here, I consider policing using the concepts of unconscionability, mutual assent, and promissory estoppel.

Calling upon the police assumes membership in America’s social contract; however, Whiteness as contract definitionally excludes Black and Indigenous people therefrom. Expectations by Black and Indigenous community members that the police work to protect and serve them because they pay police salaries with their tax dollars reflects the commonly-held expectations of the American public with respect to their public and civil servants—expectations that actually only apply to members of a body politic from which Black and Indigenous people are forbidden entrée, though they are formally members of that contract under public law.

The state not only accepts the tax dollars of Black and Indigenous people—allocating a portion of those dollars to law enforcement budgets—but actually requires that Black and Indigenous people pay their taxes as a condition of their formal membership in a social contract. The promise that the United States makes to its citizenry is that police will not deprive them of their due process rights, and that where such rights are violated by officers acting under the color of law, the citizens must be able to seek remedies from the state. Given that police are usually able to harass, torture, and kill people of color with impunity, on salaries funded by their victims, even the formal social contract should be considered unconscionable. The state forces Black and Indigenous people to participate in a bargain, extracting tax dollars for them in exchange for police services, knowing that those police services are actually intended to cause them harm.

The presence of the racial contract—that invisible common law that nullifies the formal American social contract, and which relies upon the forcible extraction and expropriation of Black and Indigenous peoples’ resources in order to create and protect white wealth—totally undermines Black and Indigenous people’s formal expectations of law enforcement. Black and Indigenous communities expect equal assistance and service from police, as per their formal rights under law, and in exchange for their tax dollars; the state gaslights them into believing that such a contract is intact. However, the state actually uses police to contain, suppress, and eliminate Black and Indigenous people—in order to perpetuate the racial contract and the system of racial capitalism for which the racial contract exists. The State—which represents the white body politic—knows that it has promised certain benefits of citizenship to all citizens and knows that Black and Indigenous citizens rely upon the promise, while also knowing that it has absolutely no intention of delivery thereof. Because there is no mutual assent between the parties, no contract actually exists.

As guardians of America’s racial contract, the police work to ensure that Black and Indigenous people stay in their physical and socio-political place; facilitate extraction and seizure of capital from Black and Indigenous people from the state; and remedy perceived breaches of white supremacist social order. On June 25, 2020, for example, news broke of the firing of three Wilmington, North Carolina police officers who were caught on a two hour-long video accidentally recorded in a patrol car making intensely racist anti-Black statements and threats. One declared that “We are just going to go out and start slaughtering them fucking n*****s.” He also suggested that he or others should “Wipe [Black Americans] off the fucking map...that’ll put ‘em back about four or five generations.”Another deplored, in response, that white people had begun “worshiping blacks”.

Photo by Tony Webster

Thus, with each police killing of a Black or Indigenous American comes increased calls for police reform or abolition. Serious calls to defund the police are now part of mainstream political lexicon, as Black and Indigenous people realize that the state is actually compelling them to pay for their own murders, or the murders of their families, friends, and neighbors. Many members of these communities realize that their privity with the police—and with the state—is illusory, and that they are not contractors, but rather the subjects and objects of the contract itself.

Communities targeted by police brutality have a right, per the doctrine of promissory estoppel, to seek remedies from the state based on their reliance upon an agreement that the police would protect and serve them in exchange for their municipal funding. Abolitionists can base an argument for reparatory justice based upon the reliance doctrine: indeed, should they be able to make a case for detrimental reliance of a community upon a contract with the local police department, a claim could theoretically be made of a municipal government for damages that would then be subtracted from the police department’s budget. Otherwise, the affected community that could demonstrate reliance and breach, and certainly that the state has made vitiating misrepresentations regarding the police’s duties to protect and serve Black and Indigenous people. Thus, the non-breaching party could demand rescission of the agreement and opt to stop funding the police. Of course, the state would have to agree to this demand, and in order for that to happen, the state must first rescind the racial contract and include Black and Indigenous people as contractors—and, thus, as full citizens, and as people with rights that the police are bound to respect.

This post is part of a continuing series on introducing critical perspectives, including critical race theory, into the teaching of first-year contracts.  Other posts in the series include:

• Guest Blogger Marissa Jackson Sow on Whiteness as Contract and the Police, Part I
• Teaching Assistants: Marissa Jackson Sow, "Whiteness as Contract"
• Teaching Assistants: Threedy, Dancing Around Gender
• Guest Post by Alan White, Systemic Racism and Teaching Contracts
• Guest Post by Deborah Post on Williams v. Walker-Thomas
• Guest Post by Chaumtoli Huq, Part III: Counter-Hegemonic Narratives
• Guest Post by Chaumtoli Huq, Part II: Freedom to Contract and the Reasonable ManGuest Post by Chaumtoli Huq, Part I: The Decolonial Framework
• Guest Post by Deborah Zalesne, The (In)Visibility of Race in Contracts: Thoughts for Teachers
• What Should a Court Do in Response to Racist Contractual Threats? Wolf v. Marlton Corp.
• Guest Post by Charles Calleros: Raising Issues of Race, Ethnicity, and Culture in 1L Contracts: Language Barriers
• Guest Post by Charles Calleros, Talking about Race in the Contracts Course: Interface with Civil Rights Laws, Part II – Consideration
• Guest Post by Charles Calleros, Talking about Race in the Contracts Course: Interface with Civil Rights Laws, Part I – Mutual Assent
• Teaching Assistants, Emily Houh's Redemptive Theory of Contract Law

Virtual Symposium Part IV: Mark Weidemaier and Mitu Gulati on Covid and Sovereign Defaults

Covid-19, Sovereign Defaults, and the Doctrine of Economic Necessity
Mark Weidemaier & Mitu Gulati

The economic devastation caused by the Covid-19 pandemic is global, but the effects are magnified in poorer countries. There is an urgent need to divert resources away from debt service and towards pandemic mitigation. Countries that mostly owe money to official lenders—i.e., the poorest countries—can get some short-term relief courtesy of the Debt Service Suspension Initiative (although few have taken advantage of this opportunity). But countries with significant private-sector debts—especially the so-called emerging markets—are in a different kind of bind. Tourism revenue, remittances, tax collection… all are down sharply, while spending needs have increased. Even a small contraction in global liquidity will push many countries into unsustainable debt situations. Some are already there.

Unfortunately, no mechanism exists to coordinate the orderly restructuring of debts on this scale. Official creditors can coordinate their response to a debt crisis—not without friction, but with relative ease. Not so for dispersed private creditors. Here, the restructuring landscape consists of flawed contractual mechanisms that require each country to negotiate restructuring terms with creditors with diverse incentives, debt instruments, and legal rights. It is a recipe for disaster. Lawyers and financial advisors will do well; everyone else will suffer.

We start from the premise that, as in bankruptcy, a stay on creditor enforcement activity will reduce the chaos surrounding restructuring talks. More important, in the present context, a stay will allow countries to divert funding to deal with the combined economic and health crisis of the pandemic. A stay may not prove necessary; most private creditors would prefer not to be seen suing a country mired in a pandemic. But creditors are heterogeneous and, as time goes on, cohesion will break down. When this happens, is there a legal basis for imposing a stay?

One possibility is the doctrine of economic necessity. This is a doctrine of customary international law and might have purchase in jurisdictions that generally incorporate international law dictates into domestic law, such as the United States and United Kingdom. As a caution, sovereigns have occasionally raised economic necessity in prior debt cases, almost always without success. And to our knowledge, the doctrine has never been successfully asserted in a U.S. or U.K. municipal court (and the courts and law of New York and England are the ones that matter for almost all emerging market foreign borrowing). Indeed, because the defense evolved in the context of “international obligations,” it is not even clear that the doctrine excuses non-performance of private contractual obligations of the sort that concern us here. But there is reason to think these problems can be overcome and that the defense might be available in the present context (discussed in this paper).

Under Article 25 of the International Law Commission’s (“ILC”) draft Articles on Responsibility of States for Internationally Wrongful Acts, a state may invoke necessity to excuse its non-performance of an “international obligation” if non-performance is the only way to address “a grave and imminent peril,” as long as non-performance does not seriously impair an essential interest of the “State or States towards which the obligation exists.” As the wording suggests, the scope of the doctrine is narrow. The peril must be grave and must outweigh the risks to other states. Even then, a state may not invoke necessity to excuse the violation of an international obligation that “excludes the possibility of invoking necessity.” Nor, for that matter, may it invoke the defense if has contributed to the state of necessity. Finally, non-performance is excused only while the threat persists. The state must resume performance when the crisis ends, and it may have to pay compensation.

Local mismanagement has contributed to almost every sovereign debt crisis in our lifetimes—probably to every sovereign debt crisis there has ever been. So one might think that the necessity defense would never be available (in much the same way that borrowers are essentially never able to raise the contract law excuse of impracticability). This has mostly been the reaction of tribunals when a sovereign has raised necessity in the context of a debt default.

As we understand these decisions, they are primarily concerned with the difficulty of verifying the existence of a state of necessity. Tribunals understand that a doctrine that excuses nonperformance also creates room for opportunism. How can judges or arbitrators tell whether conditions in a debtor state are so bad that failure to ameliorate them will cause a humanitarian disaster? How can they tell whether the debtor state is blameless for the conditions? If tribunals cannot accurately answer these questions, their errors will disrupt the smooth functioning of debt markets. And in the cases thus far, the tribunals have not been confident of the answers, and the defense has failed.

But the Covid-19 pandemic may be the exception. It is hard to blame any emerging market nation for the economic and humanitarian fallout of the pandemic. To be sure, some have worsened the situation (as have some very rich countries). And there is always second guessing of government policies. But in most or all cases, the pandemic itself will swamp other contributing factors. Moreover, unlike in other settings, here there is reason to think that official sector actors can effectively certify that a state of necessity exists—this is the clear implication of the G-20’s Debt Service Suspension Initiative, and the official sector can take other steps to make clear that there is an international consensus to this effect. These steps should ease concerns about the verifiability of the present state of necessity. Likewise, their absence in future cases will provide an easy way for tribunals to limit the precedential value of recognizing the necessity defense in the context of Covid-19.

We do not mean to suggest that the defense will be available to every country. Nor will every country wish to make the argument. However, for those in dire need, who want to avoid a debt default, this could be an option. A related argument—although not the defense itself—has been raised in a U.S. sovereign debt case involving Venezuela, Casa Express v. Republic of Venezuela. Perhaps the case will shed some light on the applicability of the doctrine in the U.S. But if a sovereign state must choose between paying international creditors or paying for a vaccine, the case for a necessity defense strikes us as clear. In such cases, the sovereign’s non-payment should be excused during the period of necessity, and bondholders should not be allowed to use non-payment as a basis for accelerating the debt.

A week or so ago, we discussed the doctrine of economic necessity with Eric Posner on our Clauses and Controversies podcast. Rightly, we suspect, he cautioned that it will be a heavy lift to persuade a municipal court to apply the doctrine. As Eric pointed out, the doctrine is vague with undefined contours. And no judge in these two jurisdictions wants to take steps that might devalue their status as financial capitals. One implication is that judicial decisions may be heavily shaped by the views expressed by the U.S. and U.K. governments. (We suppose it would also help if government officials cared about the real domestic economy and about people in poorer countries. Also: we each want a pony.)

A final note: As others have pointed out, there are other legal techniques that judges have used to deal with related situations. Dave Hoffman and Cathy Hwang discuss a fascinating set of public health cases from the late 1800s and early 1900s (here and discussed in this previous post; and also listen to the Hoffman & Wilkinson-Ryan podcast on the Hanford baby exhibition here, discussed in this previous post). Jonathan Lipson looks to the equally interesting depression era cases, some of which directly deal with our favorite topic of sovereign debt contracts (here).  And Emily Strauss has written about courts taking fairly radical steps in reforming certain contracts in the aftermath of the 2007-08 crisis (here).

Unconstitutional Contractual Relations? The Emoluments Clause and In re Trump

Pictured at left is the building now known as the Trump International Hotel in Washington, DC, but this photo is from 1911, back when the building housed the post office.  Contractual relations relating to this building are at the heart of  In re Trump, in which the Fourth Circuit, sitting en banc this week denied the President's petition for a writ of mandamus ordering the district court to permit an interlocutory appeal from its refusal to dismiss the case.

Maryland and the District of Columbia brought the suit, claiming that the President's ownership of the hotel, through a business that he controls, violates the Constitution's Foreign Emoluments Clause (Article I, § 9, cl. 8) and the Domestic Emoluments Clause (Article II, § 1, cl. 7).   The heart of the allegations (from the Amended Complaint) run as follows:

President Trump, acting through companies he owns or controls, has violated both the Foreign Emoluments Clause and the Domestic Emoluments Clause by receiving millions of dollars in payments, benefits, and other valuable consideration from foreign governments and persons acting on their behalf, as well as federal agencies and state governments. His repeated, ongoing violations include remuneration derived from: (a) leases of Trump properties held by foreign-government-owned entities; (b) purchase and ownership of condominiums in Trump properties by foreign governments or foreign-government-controlled entities; (c) other property interests or business dealings tied to foreign governments; (d) hotel accommodations, restaurant purchases, the use of venues for events, and purchases of other services and goods by foreign governments and diplomats at hotels, restaurants, and other domestic and international properties owned, operated, or licensed by President Trump; (e) continuation of the General Services Administration lease for President Trump’s Washington, D.C. hotel despite his breach of the lease’s terms, and potential provision of federal tax credits in connection with the same property; and (f) payments from foreign-government-owned broadcasters related to rebroadcasts and foreign versions of the television program “The Apprentice” and its spinoffs. Moreover, President Trump, by asserting that he will maintain the interests at issue, is poised to engage in similar constitutional violations for the duration of his presidency.

The President challenged that suit on various grounds, and the District Court granted the President's motion to dismiss (on standing grounds) as to properties other than the Trump International Hotel in Washington, DC.   The President sought certification for an interlocutory appeal of the district court's decision, which the court denied.  The President than petitioned the Fourth Circuit for a writ of mandamus that would force the district court to allow the case to proceed.  A Fourth Circuit panel not only granted the mandamus petition but ordered the suit dismissed for lack of standing. 

This week's en banc opinion reversed the panel, stressing the extraordinary nature of mandamus relief as a mechanism for challenging a decision within the discretion of a district court.  The majority opinion clearly will not be the last word.  It merely states that, even if the district court's decision to deny the President an interlocutory appeal was clearly erroneous, that error would not justify the grant of a writ of mandamus.  The standard is abuse of discretion, and the district court, even if its decision was incorrect, did not abuse its discretion. The majority acknowledged that the District and Maryland raise novel claims as to standing and as to the ability of courts to imply an injunctive remedy without statutory authorization.  However, the majority did not view those claims as so tenuous as to justify summary dismissal.

But here on the ContractsProf Blog, we are more interested in the District and Maryland's  substantive claims, and it is to be hoped that the district court at least will eventually address the merits of those claims.  It would be nice to know if the Emoluments Clauses are an actual limit on a President's ability to enter into contractual relations with foreign governments or with U.S. governmental agencies.  This issue becomes more acute during the current economic crisis.  The Trump Organization has sought relief from the Trump Administration on its $3 million lease for the Trump International Hotel.  I understand that there are issues of standing and the enforceability of the Emoluments Clause through the courts, but it is hard to read my preceding sentence and not think o tempora o mores!

Unfortunately, it seems that the barriers to getting a judicial answer to the questions at the heart of this case may be insuperable.  In any case, with the en banc court sending the case back to the district court, more than three years into the litigation, we are still pretty much at square one.  The answer may be that the plaintiffs don't have standing or courts cannot invent a remedy where the Constitution does not provide one.  Or the case might become moot because we have a new President before the case can be decided.

Case reminds us to pay for the insurance if you want recovery for a lost package

My students are always asking me about misdelivered packages, so I read this recent case out of the District of Oregon, Mansfield v. Leigh, Case No. 6:19-cv-00254-MK (behind paywall), with interest. It's a fairly straightforward case about a lost package, and a fairly straightforward analysis of your options for recovery if a package goes missing. The plaintiff was seeking over a thousand dollars in damages for the lost package, but the court finds that her recovery was limited to the fifty dollars of insurance she purchased (she actually received slightly more because the post office also refunded her service charge). 

This case is a reminder to take the postal insurance seriously. I once had a package go missing and I had insured it but not nearly for the value of what went missing. That was all on me, and I've taken that insurance situation seriously ever since. 

Border Wall Contractual Dispute

The loser of a bid to build part of Trump’s border wall has protested the bidding process leading to a rival winning the $1 billion contracts.  A complaint has been filed with the Government Accountability Office, which now has 100 days to resolve the complaint.

At issue is a questionnaire which asked what previous work any bidder had completed on the border wall within the last five years, which narrowed the qualifying bidders to just two firms. In effect, argues plaintiff Fisher Sand & Gravel, the process used by the United States Army Corps of Engineers suppressed competition by designating only two firms as sole source contractors, thus leading to a process where the end result was known ahead of time.

The construction of the highly controversial wall will thus be delayed.  Of course, everyone must observe the law, including government agencies. Contractual bidding processes involving no less than one billion taxpayer dollars should arguably be subject to particularly close scrutiny. 

An employer isn't bound by a policy unless the employee is aware of and relies upon the policy (e.g., reads the handbook!)

A recent case out of Illinois, Brown-Wright v. East St. Louis School District 189, NO. 5-18-0311 (behind paywall), finds that in order for an employee policy to operate as a binding contract, the employee has to have read the policy.

In the case, the plaintiff was suing based on an alleged violation of the sick leave payout policy. The plaintiff, however, did not find out about the policy her case was relying upon interpreting until after her employment ended. Therefore, it was not the case that she learned of the policy and continued to work as acceptance of and consideration for that policy. Because the plaintiff did not read the policy before terminating employment, she could not rely upon it now. 

This is a lesson to all of us to read those policies our employers send around. 

Texas court finds economic development corporations don't receive governmental immunity from suit

A recent case out of Texas, Rosenberg Development Corp. v. Imperial Performing Arts, Inc., No. 17-0660, tackles the question of whether economic development corporations are protected by the sovereign immunity doctrine, concluded that they are not. Interesting for its analysis of how to treat economic development corporations in this breach of contract suit. 

You and your corporate entities: often a complex story with repercussions

I got really excited when I saw this case because it's always nice to have a recent parol evidence case to look at, and this one involves movies!

It's a recent case out of Mississippi, Rosenfelt v. Mississippi Development Authority, No. 2017-CA-01120-SCT (you can listen to the oral arguments here). The MDA had communications with Rosenfelt regarding his movie studios' attempt to make movies in Mississippi, eventually guaranteeing a loan through a term sheet signed by the MDA and by Rosenfelt on behalf of his two movie studios. When Rosenfelt wanted to make another movie and applied for another loan under the terms of the agreement, the MDA turned down the request. Rosenfelt then sued for specific performance and damages. Rosenfelt initially triumphed on a motion for partial summary judgment but then, during the specific performance debate in the case, the MDA filed a summary judgment motion challenging Rosenfelt's standing, which resulted in dismissal of Rosenfelt's complaint. 

Rosenfelt appealed, alleging that there was an agreement between him personally and the MDA. However, the court noted that all communications from the MDA were directed explicitly to Rosenfelt as president of the relevant movie studio. The court's decision came down to contract interpretation: All of the written documents in the case unambiguously referred to Rosenfelt in his official corporate capacity or were signed by Rosenfelt in his official corporate capacity. Given the lack of ambiguity on the face of the documents, the court refused to consider parol evidence as to whether Rosenfelt was personally a party to any of the agreements.  Because all of Rosenfelt's allegations concerned his personal agreement with the MDA, the court dismissed the suit. 

This case serves as a reminder that, once you have set up corporate entities, you need to be careful to remember how those corporate entities impact not just your legal liabilities but also your legal rights. 

Passport Issuance Not a Contractual Activity

Perhaps unsurprisingly, the Seventh Circuit Court of Appeals has held that a nation state issuing a passport to one of its citizens cannot be sued for breach of contracts or a tort, for that matter.

Chinyere Nwoke sued the a consulate of Nigeria after paying $500 for passports for her and her son that she never received.  Arguing breach of contract, the district court dismissed her claim under the Foreign Services Immunity Act.  On appeal, Ms. Nwoke invoked the exception for acts “based upon a commercial activity.” 

A foreign state is immune for federal jurisdiction for its “sovereign or public acts,” but not its acts that are “private or commercial in nature.”  Ms. Nwoke argued that the consulate’s actions were commercial because it was “making a profit from a fraudulent activity” (presumably charging for passports never actually issued).  However, courts do not consider a nation state’s motivation in determining whether an activity is sovereign or commercial.  Because private persons cannot issue passports, the consulate’s activities were of a sovereign nature and immunity thus applied.

This case makes sense, but is of course nonetheless unfortunate for Ms. Nwoke, whose only channel of complaint now seems to be to the government of Nigeria; a case of complaining to the very wrongdoer that oversaw the wrong. Government corruption remains a serious issue around the world.  

The case is Nwoke v. Consulate of Nigeria, 2018 WL 3216888

Trump Seeks to Alter Post Office Contracts with Amazon

As widely reported in, for example, the Washington Post, whose owner founded Amazon, President Trump has pushed Postmaster General Megan Brennan to double the rate that the post office charges Amazon.com and some, but not all, similar online retailers.  

The contracts between the Postal Service and Amazon are secret out of concerns for the company's delivery systems.  They must additionally be reviewed by a regulatory commission before being changed.  That, perhaps unsurprisingly, does not seem to phase President Trump who appears to be upset at both Amazon and the Washington Post.   The dislike of the latter needs no explanation, but why Amazon?  Trump has accused it of pushing brick-and-mortar stores out of business.  Others point out that if it weren't for Amazon, it is the post office which may be out of business.

Aside from the political aspects of this, does Trump have a point?  Is Amazon to blame for regular stores going out of business?  I am no business historian, but it seems that Amazon and others are taking advantage of what the marketplace wants: easy online shopping.  Yes, it is very sad that smaller, "regular" stores are closing down, most of us probably agree on that.  But retail shopping and other types of business contracting will evolve over time as it has in this context.  That's hardly because Amazon was founded; surely, the situation is vice versa.  Such delivery services are fulfilling a need that arose because of other developments.

From an environmental point of view, less private vehicle driving (for shopping, etc.) is better.  Concentrating the driving among fewer vehicles (FedEx, UPS, USPS, etc.) is probably better, although I have done researched this statement very recently.  One fear may be the additional and perhaps nonexistent/overly urgent need for stuff that is created when it becomes very easy to buy, e.g., toilet paper and cat litter online even though that may in and of itself create more driving rather than just shopping for these items when one is out and about anyway, but that is another discussion.

Suffice it to say that Trump should respect the federal laws governing the Postal Service _and_ existing contracts. What a concept!  If the pricing structure should be changed, it clearly should not be done almost single-handedly by a president.  

Meanwhile, the rest of us could consider if it is really necessary to, for example, get Saturday snail mail deliveries and to pay only about 42 cents to send a letter when the price of such service is easily quadruple that in other Western nations (Denmark, for example, where national postal service has been cut back to twice a week only and where virtually all post offices have been closed).  Fairly simple changes could help the post office towards better financial health.  This, in turn, would help both businesses and private parties.  

 

We *think* there's an NDA. Or is there?

Someday I will blog about things other than NDAs again but I feel like every time I open the internet there's another story about an NDA. Everyone today was talking about last night's interview of Stormy Daniels on Jimmy Kimmel Live!, which was a bizarre series of answering-questions-with-questions and playing coy and talking around the main issue, which was her alleged affair with Donald Trump in 2006. You can find lots of articles online; here's one that lays it out. Those trying to summarize the interview generally seem to assume that Daniels must be restricted by an NDA, because she could say if there wasn't an NDA, but it's the proving of a negative, basically; the reporters are trying to make sense of the blank space the non-answers leave in their wake. 

It's all had me wondering about the role NDAs played--or maybe more importantly, didn't seem to play?--during the Clinton impeachment. Lots of details about Clinton's sexual harassment history came out during the impeachment, and from my brief research into it, it doesn't seem like there were any NDAs in play. Does anybody have other information about this? How do the number of NDAs around Trump in play today shift our perspective, conversation, and legal analysis? 

Whitefish Energy - Strongarming Puerto Rico into Contractual Acceptance and Compliance?

As reported on The Hill and in several other national and international news outlets, tiny Montana energy company Whitefish Energy – located in Interior Secretary Ryan Zinke’s very small hometown – stands to profit greatly from its contract with the Puerto Rico Electric Power Authority. That’s fine, of course. However, highly questionable issues about the contract have surfaced recently.   For example, Whitefish very famously prohibited various government bodies from “audit[ing] or review[ing] the cost and profit elements of the labor rates specified herein.”

What were those? The Washington Post reports that under the contract, “the hourly rate was set at $330 for a site supervisor, and at $227.88 for a ‘journeyman lineman.’ The cost for subcontractors, which make up the bulk of Whitefish’s workforce, is $462 per hour for a supervisor and $319.04 for a lineman. Whitefish also charges nightly accommodation fees of $332 per worker and almost $80 per day for food.” Another news source notes that “[t]he lowest-paid workers, according to the contract, are making $140.26 an hour. By comparison, the minimum wage in Puerto Rico is $7.25 an hour … [T]he average salary for a journeyman electrical lineman is $39.03 per hour in the continental U.S. However, a journeyman lineman on Whitefish Energy's Puerto Rico project will earn $277.88 per hour.”

Little wonder why the company did not want anyone to “audit or review” its labor rates. If it wasn’t for the apparent “old boy”/geographical connections that seemed to have led to this contract to have been executed in the first place, hopefully no Puerto Rican official would have accepted this contract in the form in which it was drafted.

But it doesn’t end there. When the San Juan mayor called for the deal to be “voided” and investigated, Whitefish representatives tweeted to her, “We’ve got 44 linemen rebuilding power lines in your city & 40 more men just arrived. Do you want us to send them back or keep working?”

To me, this entire contract to violate several established notions of contract law such as, perhaps, undue influence or duress (in relation to contract formation but perhaps also, if possible, to continued contractual performance), bad faith, perhaps even unconscionability, which is a alive and well in many American jurisdictions.

This could work as an interesting and certainly relevant issue-spotter for our contracts students. It also gives one a bad taste in the mouth for very obvious reasons. It will be interesting to see how this new instance of potentially favoring contractual parties for personal reasons will pan out.

Los Angeles Allegedly Violates Free Speech Rights with Entertainment Contracts

Pershing Square in downtown Los Angeles is an outdoor area that is regularly the home of free summer concerts and demonstrations of various kinds throughout the year. You would think you could snap as many photos as you wanted of events there since it is an outdoor, public area, right?

This past summer, the answer was no. A photojournalist wanted to take pictures of, among others, the B-52s. However, he was informed of a policy that had been set up with the performers per contractual agreement. The policy barred professional photography equipment, albeit not cell phone usage, from the square during concerts.

ACLU has complained to the Los Angeles City Attorney and the General Manager of the Department of Recreation and Parks, claiming that the city does not have a right to contract away the general public’s First Amendment rights because some performers want it that way.

How do you see contractual rights intersecting with the First Amendment in the government contracting context? Comment below!

Prison Telephone Service Provider Continues to Lose on Enforcing Arbitration Provision

I have already blogged about a related case out of the Western District of Arkansas, in which the court concluded that prison inmates did not consent to arbitrate when they funded their telephone accounts to enable them to make calls. This case out of the Third Circuit, James v. Global Tellink Corp., No. 16-1555, affirms a similar conclusion by the District of New Jersey. To refresh your memory, GTL provides telephone services to prison inmates. Inmates sign up for accounts and deposit funds into the account, either through GTL's website or through its automated telephone service. When interacting with GTL's automated telephone service, users are alerted that their transactions are governed by the terms of use found online but they are not required to indicate their assent to those terms. Inmates have brought a class action alleging that GTL's charges are unconscionable. GTL moved to compel arbitration based on its online terms of use, but the district court found that those who used GTL's automated telephone service never agreed to be bound by those terms of use. 

The Third Circuit agreed with the district court's conclusion. The subject of how to form a binding contract through interactive telephone services was a new and different one, as most of these cases involve websites these days. GTL argued that the inmates manifested the requisite assent by continuing to use the telephone services after being notified there were terms of use. But the inmates never had to perform any affirmative act to indicate their assent, and they were never told that their continued use alone would constitute such assent. None of the inmates in question who used the automated telephone services had ever taken the necessary extra step to access GTL's website to see the terms of use, so they were never presented with the terms of use or the arbitration provision in question. The inmates simply never received the terms, and were never told that use of the telephone system would bind them to the terms. 

Inmates Didn't Consent to Be Bound to a Contract Every Time They Used the Telephone

Myanna has already blogged about the problem of inmate telephone rates being set unreasonably high. Myanna's blog post was about a dispute in California but a recent decision out of the Western District of Arkansas, In re Global Tel*Link Corporation ICS Litigation, Case No. 5:14-CV-5275 (behind paywall), deals with the same issue. (There are several of these litigations, as well as other government debates about regulation of these rates.) In the Arkansas decision, the court refuses to compel arbitration. 

Global Tel*Link's allegation was that the inmates consented to the terms of use when they funded their accounts to enable them to make phone calls, and the terms of use contained an arbitration clause. Every time the inmates put money on their accounts with Global Tel*Link, they heard a message similar to the following: 

Please note that your account, and any transactions you complete with GTL or any of its affiliates, are governed by the terms of use and the privacy statement posted at www.connectnetwork.com . The terms of use and the privacy statement were most recently revised on March 30, 2015.

The court determined, however, that a reasonable person would not have understood this message as referring to a contract and as constituting consent to be bound by that contract, since it never used any contract buzzwords like "contract," "consent," "agree," "assent," "offer," "accept," etc. The court said that, as far as the inmate listening to the message was concerned, the terms of use and privacy statements could have been just generally applicable legal rights imposed by regulators. The court characterized Global Tel*Link's behavior as basically hiding the contract ball: Global Tel*Link could have straightforwardly said the inmates were entering into a contract but instead "invite[d] [them] to visit a website where [they] might accidentally stumble across this fact." (I went to connectnetwork.com. The terms of use are located at the bottom of the page and required me to scroll to find them, and I just blogged about a case where the persistent location of the terms of use hyperlink at the bottom of the page didn't constitute enough notice.)

Because the inmates never signed anything, never clicked or punched any button signifying acceptance of contract terms, never had an opportunity to review the terms of use prior to using Global Tel*Link's services, and would not reasonably have understood the message to be referring to contractual terms, the inmates did not assent to the contract and thus are not bound by the contract's arbitration provision. 

Iowa Bill Proposal: To Get Faculty Position, Must Have Correct Political Affiliation

Just when you think the political debacle in this country cannot get anymore grotesque, here's a recent proposal by Iowa State Senator March Chelgren: to counter the liberal slant at Iowa's three public universities, the job candidates' political affiliations would have had to be considered.   Why?  To ensure "balanced speech" and avoid the "liberal slant" in public universities these days. 

Under SF 288, the universities would use voter registration information when considering job applicants, and could not make any hire that would cause declared Democrats or Republicans on the faculty to outnumber the other party by more than 10%.

Demonstrating the very deep and logical (not!) argument, check this line of thinking: Chelgren said professors who want to be hired could simply change their party affiliation to be considered for the position.  "We have an awful lot of taxpayer dollars that go to support these fine universities," he said. "(Students) should be able to go to their professors, ask opinions, and they should know publicly whether that professor is a Republican or Democrat or no-party affiliation, and therefore they can expect their answers to be given in as honest a way possible. But they should have the ability to ask questions of professors of different political ideologies."

Duh!

Providing "Retirement Benefits" Isn't the Same as Providing Health Insurance Coverage

A recent case out of New York, Wilson v. New York State Thruway Authority, 931-16, deals with the collective bargaining agreement between the New York State Thruway Authority and its retirees over whether the Thruway Authority was contractually bound to provide health insurance coverage to the retirees at no cost. The retirees had enjoyed free health insurance until April 1, 2016, when the Thruway Authority required them to start paying six percent of their premiums. The retirees wanted to introduce evidence that the parties understood that the Thruway Authority was going to pay all of their health insurance premiums, pursuant to the collective bargaining agreement. 

The problem was that the contract between the parties contained no such obligation and the court found that the contract was unambiguous on its face. All that the contract stated was that the Thruway Authority should provide "retirement benefits" made available by New York statutes the contract went on to enumerate. None of those statutes contained provisions requiring the Thruway Authority to provide health insurance coverage. In fact, health care benefits were governed by different New York statutes, not the ones enumerated, and New York state courts had long pointed out that "retirement benefits" and "health care benefits" were two different things governed by two different statutes under New York law. Given that, the court concluded that "retirement benefits" was an unambiguous term of art that the parties knew the definition of, given their particular citation of New York statutes to define it. The court refused to allow extrinsic evidence in the face of this lack of ambiguity. If the retirees had wished the Thruway Authority to pay for their health insurance premiums, they should have included an express provision saying that in the collective bargaining agreement, as many other collective bargaining agreements construed under New York law had done. 

This decision is fairly straightforward as a matter of the law: finding that the term was unambiguous (and indeed basically defined within the document through the statutory citations) and so therefore extrinsic evidence was unnecessary to decide the breach of contract action (the court here concluded that, with no obligation to pay the health insurance premiums, the Thruway Authority had not breached the contract). However, it is a legal dispute that we might see more and more of, as deals with retirees are reevaluated and altered in an age of shrinking budgets. 

Apollo 11 Moon Rock Bag Stolen, Sold to BFPV at Auction, Now Government Wants it Back

In times with enough serious and often depressing news, I thought I would bring you this little neat story (with profuse apologies to everyone, including my co-bloggers, for my virtual absence for a few months):

An Apollo 11 bag used to protect moon rocks samples was stolen by Max Ary, a former curator convicted in 2006 of stealing and selling space artifacts that belonged to the Cosmosphere space museum in Hutchinson, Kansas. Mr. Ary subsequently served two years in prison and was sentenced to pay more than $132,000 in restitution. Space artifacts found in his home, including the Apollo 11 bag, were forfeited to meet that debt. However, the Apollo 11 bag was incorrectly identified as Ary's and subsequently sold to Nancy Carlson for $995 in February 2015 at a Texas auction held on behalf of the U.S. Marshals Service.

The government petitioned the court to reverse the sale and return the lunar sample bag to NASA, alleging that due to a mix up in inventory lists and item numbers, the lunar sample bag that was the subject of the April 2014 forfeiture order was mistakenly thought to be a different bag and that no one, including the United States, realized at the time of forfeiture that this bag was used on Apollo 11. The government cited cases where federal courts vacated or amended forfeiture orders, including where inadequate notice was provided to a property owner, as a justification for the bag's return to NASA.

Judge J. Thomas Marten ruled in the U.S. District Court for Kansas that Ms. Carlsen obtained the title to the historic artifact as "a good faith purchaser, in a sale conducted according to law." With her title to the bag now ordered by the Kansas court, Carlson needs to file a motion in the U.S. District Court for Texas for its return from NASA's Johnson Space Center in Houston. However, “[t]he importance and desirability of the [lunar sample] bag stems solely and directly from the efforts of the men and women of NASA, whose amazing technical achievements, skill and courage in landing astronauts on the moon and returning them safely [to Earth] have not been replicated in the almost half a century since the Apollo 11 landing," the judge wrote … Perhaps that fact, when reconsidered by the parties, will allow them to amicably resolve the dispute in a way that recognizes both of their legitimate interests," J. Marten wrote.

H/t to Professor Miriam Cherry for bringing this story to my attention.